Strategic Management

MGT 6301
Lesson 9
International Strategy

Nuresh Eranda, PhD

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Lesson outline
• Internationalization and international business
• Strategic issues in international business
• International sources of competitive advantage
• Objectives for global competitive advantage
• International strategies
• International entry modes with strategic implications
• Global value chain (GVC)
• Strategies in emerging markets

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Necessity of international business
• Flow of ideas, services, and capital across the world

• Offers consumers new choices

• Permits the acquisition of a wider variety of products

• Facilitates the mobility of labor, capital, and technology

• Provides challenging employment opportunities

• Reallocates resources, makes preferential choices, and shifts activities to

a global level
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How markets differ from
country to country
• Consumer tastes and preferences

• Consumer buying habits

• Market size and growth potential

• Distribution channels

• Driving forces

• Competitive pressures

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The four big strategic issues
in competing multinationally
• Whether to customize a company’s offerings in each different country market to
match preferences of local buyers or offer a mostly standardized product worldwide

• Whether to employ essentially the same basic competitive strategy in all countries
or modify the strategy country by country

• Where to locate a company’s production facilities, distribution centers, and

customer service operations to realize the greatest locational advantages

• How to efficiently transfer a company’s resource strengths and capabilities from

one country to another to secure competitive advantage
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Internationalization drivers

Source: G. Yip, Total Global Strategy II, FT/Prentice Hall, 2003, Chapter 2. 6
International sources of competitive
advantage
• The location of activities is a crucial source of potential advantage

• Porter’s Diamond
Suggests that there are inherent reasons why some nations are more
competitive than others, and why some industries within nations are
more competitive than others

• International Value Network

For international companies, advantage can be drawn from the
international configuration of their value network
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Porter’s Diamond
• There are four interacting determinants of national, or home base, advantage in
particular industries
• Factor conditions:
Factors of production’ that go into making a product or service (i.e. raw materials,
land and labor)
e.g. Apparel industry in Sri Lanka
• Demand conditions:
The nature of the domestic customers can become a source of competitive advantage
e.g. Japanese customers’ high expectations of electrical and electronic equipment
provided an opportunity for Japanese corporations to good at electronics
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Porter’s Diamond
• Related and supported industries:
Local ‘clusters’ of related and mutually supporting industries can be an important source of
competitive advantage
E.g. Italy - shoes with a supporting leather industry, Denmark - diary & an industry focused
on food enzymes.

• Firm strategy, industry structure, and rivalry:

The characteristic strategies, industry structures and rivalries in different countries can also
be bases of advantage
e.g. Germany focused on methodical product & process improvements

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Porter’s Diamond

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Source: Porter (1990)
International Value Network
• Different skills, resources and costs of countries around the world can be
systematically exploited in order to locate each element of the value chain in
that country or region where it can be conducted most effectively and
efficiently

• Global outsourcing:
Purchasing services and components from the most appropriate suppliers
around the world, regardless of their location

• Creation of complex networks of intra and interorganisational relationships

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The Global Component Network for Ford’s
European Manufacturing of the Escort

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Objectives for global competitive advantage

Efficiency • Lower the cost of the firm’s operations and activities

on a global scale.

• The ability to manage diverse country specific risks

Flexibility and opportunities by tapping resources in individual
countries and exploiting local opportunities

• Develop the firm’s products, technologies,

Learning capabilities, and skills by internalizing knowledge
gained from international ventures

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Cost reduction Vs local responsiveness
Cost reduction Local responsiveness
• Mass producing a standardized product • Arise from:
at an optimal location. • Differences in consumer taste and
• Intense: preferences.
• in commodity industries. • Differences in infrastructure and
• Where competitors are in low cost traditional practices.
locations.
• Differences in distribution channels.
• Where there is persistent excess
capacity. • Host government demands
• Where there are low switching costs.
• Because of greater international
competition

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International Strategies

Need for global integration High

Global Transnatinal
Strategy Strategy

Multi
Domestic
Strategy
Low

Low High
Need for local responsiveness 15
International Strategies

• Multi-domestic Strategy
Strategic & operating decisions are decentralized to the strategic business
unit in each country to tailor products to the local market.

• Global Strategy
Assumes more standardization of products across country markets

• Transnational Strategy
The firm seeks to achieve both global efficiency and local responsiveness

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Transnational Strategy

• Seeks to achieve both global efficiency and local responsiveness

• Difficult to achieve because of simultaneous requirements
 Strong central control and coordination to achieve efficiency
 Decentralization to achieve local market responsiveness
• Must pursue organizational learning to achieve competitive advantage

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Case study:
Transnational strategy
• Some 90% of the product line is identical across
more than two dozen countries.
• IKEA modifies some furniture offerings to suit
tastes in individual countries.
• An overall, standardized marketing plan is
centrally developed at the firm’s headquarters in
Sweden; but is implemented with local
adjustments.
• Management decentralizes some decision-making
to local stores, such as product displays and
language to use in advertising

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Transnational Strategy at Whirlpool

• Creating new innovative products

• Global production

• Globalization of research to identify the customer΄s needs

• Online problem solve methods

• Doing the functional activities in various place (countries) by giving

priority to low-cost

• Experience the creativity and depth of research and analysis

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International entry modes
• Staged international expansion

Firms initially use entry modes that allow them to maximize

knowledge acquisition whilst minimizing the exposure of their
assets

Licensing & Strategic Foreign direct

Exporting
franchising alliances investment

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Entry modes
• Born global firms
New small firms that internationalise rapidly (usually in new
technologies)

• Emerging country multinationals

Building unique capabilities in the home market but exploiting
them in international markets very quickly.

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Exporting
 Common way to enter new international markets.
 No need to establish operations in other nations.
 Establish distribution channels through contractual relationships.
 May have high transportation costs.
 May encounter high import tariffs.
 May have less control on marketing and distribution.
 Difficult to customize product.

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Licensing
 Firm authorizes another firm to manufacture & sell its
products
 Licensing firm is paid a royalty on each unit produced and sold.
 Licensee takes risks in manufacturing investments.
 Least risky way to enter a foreign market.
 Licensing firm loses control over product quality &
distribution.
 Relatively low profit potential.

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 Acquisitions
 Enable firms to make most rapid international expansion.
 Can be very costly.
 Legal and regulatory requirements may present barriers to
foreign ownership.
 Usually require complex and costly negotiations.
 Potentially disparate corporate culture.

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Strategic alliances
• Cooperative agreements with foreign companies are a means to
 Enter a foreign market or
 Strengthen a firm’s competitiveness in world markets

• Purpose of alliances
 Joint research efforts
 Technology-sharing
 Joint use of production or distribution facilities
 Marketing / promoting one another’s products

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Strategic Appeal of Strategic Alliances
• Gain better access to attractive country markets from host country’s
government to import and market products locally
• Capture economies of scale in production and/or marketing
• Fill gaps in technical expertise or knowledge of local markets
• Share distribution facilities and dealer networks
• Direct combined competitive energies toward defeating mutual rivals
• Take advantage of partner’s local market knowledge and working
relationships with key government officials in host country
• Useful way to gain agreement on important technical standards
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 Wholly-Owned Subsidiary

 Most costly & complex of entry alternatives.

 Achieves greatest degree of control.

 Potentially most profitable, if successful.

 Maintain control over technology, marketing and

distribution.

 May need to acquire expertise & knowledge that is

relevant to host country.
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Organizational culture for a global
organization
• Value and promote a global perspective in all major initiatives.

• Value international competence and cross-cultural skills among their

employees.

• Adopt a single corporate language for business communication.

• Promote interdependency between headquarters and subsidiaries.

• Subscribe to appropriate ethical standards.

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Global value chain (GVC)
• The value chain describes the full range of activities that
firms and workers perform to bring a product from its
conception to end use and beyond

• This includes activities such as design, production,

marketing, distribution and support to the final consumer

• In the context of globalization, the activities that constitute

a value chain have generally been carried out in inter-firm
networks on a global scale

• GVC analysis provides a holistic view of global industries

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Fragmentation of production: The example of Boeing 787

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The process of upgrading in GVCs
• Process upgrading: efficiency gains that allow the capture of a part of the
chain unreachable at lower levels of competence

• Product upgrading: the acquisition of technological capability that permits the

introduction of a new product or improving an existing one

• Functional upgrading: a producer manages to move to a different segment of

the supply chain with higher value-added characteristics

• Chain upgrading: participating on a different, higher value-added supply chain

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Case study: Sri Lankan apparel industry
• Discuss the upgrading possibilities in apparel GVC under:
• Process upgrading
• Product upgrading
• Functional upgrading
• Chain upgrading

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Value adding opportunity through
activities in GVCs

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How emerging markets differ from
other countries
• Recent fast economic growth
• Increasing competitive pressures for developed countries
• Difficulties in doing business in emerging economies
(Impediments in emerging economies)
 Insecure intellectual property rights
 Higher government bureaucracy
 Insufficient local talents for business operations
 Barriersfor distribution and communication due to infrastructure
problems
 Endemic corruption

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Strategic choices in emerging markets
• Emerging markets provide good opportunity for global and local
companies

• Strategic choices in emerging markets are shaped by institutional

voids
1. Replicate or adapt
2. Compete alone or collaborate
3. Accept or attempt to change market context
4. Enter, wait or exit

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Basic questions multinational corporations
(MNCs) answer to compete in emerging markets
• Who is the emerging-middle class market in these countries, and what kind
of business model will effectively serve their needs?
• What are the key characteristics of the distribution networks in these
markets, and how are the networks evolving?
• What mix of local and global leadership is required to foster business
opportunities?
• Should the MNC adopt a consistent strategy for all its business units within
one country?
• Will local partners accelerate multinational’s ability to learn about the
market?

Source: Prahalad and Lieberthal (2008) The end of Corporate Imperialism

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Summary
• Internationalization and international business
• Strategic issues in international business
• International sources of competitive advantage
• Objectives for global competitive advantage
• International strategies
• International entry modes with strategic implications
• Global value chain (GVC)
• Strategies in emerging markets

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